What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2021-06-29 compared with 2020-06-24 · 368 added, 212 removed, 446 unchanged (57% of the section changed)

Risk Factors.

General Business Risks

A description of the risks and uncertainties associated with our business is set forth below.

You should carefully consider such risks and uncertainties, together with the other information contained in this report and in our other public filings before investing in our common stock.

If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings.

In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

Risk Factor Summary

The following is a summary of the risks and uncertainties that could cause our business, financial condition or operating results to be harmed.

We encourage you to carefully review the full risk factors contained in this report in their entirety for additional information regarding these risks and uncertainties.

Risks Related to Our Business and Industry

● We rely heavily on sales to certain customers, including the U.S.

government, particularly to agencies of the Department of Defense, and HAPSMobile, Inc.

Historically, we have derived a significant portion of our total sales and our small UAS and tactical missile systems sales from the U.S.

and SoftBank Corp.

related to our design and development of HAPS UAS.

● A decline in the U.S.

and other government budgets, changes in spending or budgetary priorities, or delays in contract awards may significantly and adversely affect our future revenue.

● Military transformation and changes in overseas operational levels may affect future procurement priorities and existing programs, which could limit demand for our UAS.

● We operate in evolving markets, which makes it difficult to evaluate our business and future prospects.

● We face competition from other firms, many of which have substantially greater resources.

● If the UAS, UGV, TMS, and commercial UAS markets do not experience significant growth, if we cannot expand our customer base or if our products and services do not achieve broad acceptance, then we may not be able to achieve our anticipated level of growth.

● Our international business poses potentially greater risks than our domestic business.

● If we are unable to manage the increasing complexity of our business or achieve or manage our expected growth, our business could be adversely affected.

● The markets in which we compete are characterized by rapid technological change, which requires us to develop new products and product enhancements, and could render our existing products obsolete.

● We expect to incur substantial research and development costs and devote significant resources to identifying and commercializing new products and services, which could significantly reduce our profitability and may never result in revenue to us.

● If critical components or raw materials used to manufacture our products or used in our development programs become scarce or unavailable, then we may incur delays in manufacturing and delivery of our products and in completing our development programs, which could damage our business.

● Our future profitability may be dependent upon achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our products.

Failing to achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.

● We face significant risks in the management of our inventory, and failure to effectively manage our inventory levels may result in product recalls or supply imbalances that could harm our business.

● Due to the volatile and flammable nature of certain components of our products and equipment, fires or explosions may disrupt our business or cause significant injuries, which could adversely affect our financial results.

● The operation of UAS in urban environments may be subject to risks, such as accidental collisions and transmission interference, which may limit demand for our UAS in such environments and harm our business and operating results.

● Shortfalls in available external research and development funding could adversely affect us.

● Our work for the U.S.

government and international governments may expose us to security risks.

● Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of our portfolio investments and in interest rates.

● Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.

● Borrowings under our credit facilities could adversely affect our financial condition and restrict our operating flexibility.

● We face various risks related to the COVID-19 novel coronavirus pandemic and similar public health crises which may adversely impact our business.

Risks Related to Our U.S.

Government Contracts

● We are presently classified as a small business defense contractor and the loss of our small business status may adversely affect our ability to compete for small business set-aside US government contracts.

● We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.

● Our business could be adversely affected by a negative audit or investigation by the U.S.

● Some of our contracts with the U.S.

government allow it to use inventions developed under the contracts and to disclose technical data to third parties, which could harm our ability to compete.

government contracts are generally not fully funded at inception and contain certain provisions that may be unfavorable to us, which could prevent us from realizing our contract backlog and materially harm our business and results of operations.

government contracts are subject to a competitive bidding process that can consume significant resources without generating any revenue.

● We are subject to procurement rules and regulations, which increase our performance and compliance costs under our U.S.

government contracts.

Risks Related to Legal and Regulatory Requirements

● We could be prohibited from shipping our products to certain countries if we are unable to obtain U.S.

government authorization regarding the export of our products, or if current or future export laws limit or otherwise restrict our business.

In addition, failure to comply with export laws could result in fines, export restrictions and other sanctions and penalties.

● Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies, or limitations put on the use of small UAS in response to public privacy concerns, may prevent us from expanding the sales of our small UAS to non-military customers in the United States.

● Our business may be dependent upon our employees obtaining and maintaining required security clearances, as well as our ability to obtain security clearances for the facilities in which we perform sensitive government work.

● As a manufacturer of commercial UAS, we are subject to various government regulations and may be subject to additional regulations in the future, violation of which could subject us to sanctions or otherwise harm our business.

● We are subject to pending legal proceedings that may disrupt our business, cause us to incur substantial costs, expose us to significant legal liabilities and could have a material adverse impact on our financial performance.

● Our business is subject to federal, state and international laws regarding data protection, privacy, and information security, as well as confidentiality obligations under various agreements, and our actual or perceived failure to comply with such obligations could damage our reputation, expose us to litigation risk and adversely affect our business and operating results.

Risks Related to Our Intellectual Property

● If we fail to protect, or incur significant costs in defending or enforcing our intellectual property and other proprietary rights, our business, financial condition and results of operations could be materially harmed.

● We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time consuming and limit our ability to use certain technologies in the future.

Risks Related to Securities Markets and Investment in Our Stock

● Our management, whose interests may not be aligned with yours, is able to exert significant influence over all matters requiring stockholder approval.

● Delaware law and anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could make it more difficult to acquire us and limit your ability to sell your shares at a premium.

Risks Related to Our Business and Industry

We rely heavily on sales to certain customers, including the U.S.

government, particularly to agencies of the Department of Defense, and HAPSMobile, Inc.

and SoftBank Corp.

related to our design and development of HAPS UAS.

Historically, we have derived a significant portion of our total sales and our small UAS and TMS sales from the U.S.

government and its agencies.

Additionally, more recently, we have derived a significant portion of our revenue from contracts with HAPSMobile, Inc.

and SoftBank Corp.

related to our design and development of HAPS UAS.

Sales to the U.S.

25 unchanged sentences

In fiscal year 2021, HAPSMobile accounted for 11% of our total revenue.

Our Design and Development Agreement with HAPSMobile allows HAPSMobile to terminate the contract at its convenience for any reason.

The termination of this contract or the loss of revenues from programs with HAPSMobile, could cause our revenue to decline and materially adversely affect our results of operations.

In May 2021, we and HAPSMobile mutually agreed to terminate our Design and Development Agreement and we entered into a Master Design and Development Agreement with SoftBank to continue design and development work on HAPS UAS.

The Master Design and Development Agreement allows SoftBank to terminate the contract at its convenience for any reason.

The termination of this contract or the loss of revenues from programs with HAPSMobile and/or SoftBank related to the design and development of HAPS UAS, could cause our revenue to decline and materially adversely affect our results of operations.

A decline in the U.S.

and other government budgets, changes in spending or budgetary priorities, or delays in contract awards may significantly and adversely affect our future revenue.

Because we generate a significant portion of our total sales and our small and medium UAS and TMS sales from the U.S.

government and its agencies, our results of operations could be adversely affected by government spending caps or changes in government budgetary priorities, as well as by delays in the government budget process, program starts, or the award of contracts or orders under existing contracts.

As a result, our business may be impacted due to shifts in the political environment and changes in the government and agency leadership positions under the new U.S.

administration.

We cannot assure you that current levels of congressional funding for our products and services will continue and that our business will not decline.

If annual budget appropriations or continuing resolutions are not enacted timely, we could face U.S.

government shutdowns, which could adversely impact our programs and contracts with the U.S.

government, our ability to receive timely payment from U.S.

government entities and our ability to timely obtain export licenses for our products to fulfill contracts with our international customers.

Additionally, there is a possibility that political decisions made by the new U.S.

administration, or an impasse on policy issues, could impact future spending and program authorizations may not increase or may decrease or shift to programs in areas in which we do not provide products or services or are less likely to be awarded contracts.

Such changes in spending authorizations and budgetary priorities may occur as a result of shifts in spending priorities from defense-related and other programs as a result of competing demands for federal funds and the number and intensity of military conflicts or other factors.

Military transformation and changes in overseas operational levels may affect future procurement priorities and existing programs, which could limit demand for our UAS.

2 unchanged sentences

military has reduced its presence and operational activity in Afghanistan and Iraq, reducing demand for certain of our small UAS products from prior levels.

We cannot predict whether the reduction in overseas operational levels will continue, how future procurement priorities related to defense transformation will be impacted or how changes in the threat environment will impact opportunities for our small UAS business in terms of existing, additional or replacement programs.

If defense transformation or overseas operations cease or slow down, then our business, financial condition and results of operations could be impacted negatively.

We cannot predict whether the reduction in overseas operational levels will continue, how future procurement priorities related to defense transformation will be impacted or how changes in the threat environment will impact opportunities for our UAS business, including the ISR services we provide, in terms of existing, additional or replacement programs.

If defense transformation or overseas

operations cease or slow down, then our business, financial condition and results of operations could be impacted negatively.

We operate in evolving markets, which makes it difficult to evaluate our business and future prospects.

3 unchanged sentences

Accordingly, our business and future prospects may be difficult to evaluate.

We cannot accurately predict the extent to which demand for our products will increase, if at all.

We cannot accurately predict the extent to which demand for our products and services will increase, if at all.

The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving markets could impact our ability to do the following:

4 unchanged sentences

● attract and retain additional engineers and other highly-qualified personnel;

● successfully develop and commercially market new products;

● successfully develop and commercially market new products and services;

● adapt to new or changing policies and spending priorities of governments and government agencies;

3 unchanged sentences

The defense industry is highly competitive and generally characterized by intense competition to win contracts.

Our current principal small UAS competitors include Elbit Systems Ltd., FLIR Systems, Inc., L3 Technologies, Inc.

Our current principal small UAS competitors include Elbit Systems Ltd., Teledyne Technologies, Inc., L3 Technologies, Inc.

and Lockheed Martin Corporation.

We do not view large UAS such as Northrop Grumman Corporation’s Global Hawk, General Atomics, Inc.’s Predator and related products, The Boeing Company’s ScanEagle and Textron Inc.’s Shadow as direct competitors because they perform different missions, do not typically deliver their information directly to front-line ground forces, and are not hand launched and controlled.

However, we cannot be certain that these platforms will not become direct competitors in the future.

Our principal medium UAS competitors include Martin UAV and Northrop Grumman’s V-Bat , Textron, Inc.’s Aerosonde and L3 Harris Technologies’ FVR-90 , Elbit Systems Ltd.

and Israeli Aircraft Industries.

We do not view large UAS such as Northrop Grumman Corporation’s Global Hawk or General Atomics, Inc.’s Predator and its derivatives as direct competitors to our small UAS because they perform different missions, do not typically deliver their information directly to front-line ground forces, and are not hand launched and controlled.

We do not view large UAS such as Northrop Grumman Corporation’s Global Hawk or General Atomics, Inc.’s Predator and its derivatives as direct competitors to our medium UAS because they perform different missions, require a larger logistical footprint and cost considerably more to procure and operate.

However, we cannot be certain that these platforms will not become direct competitors to our small and medium UAS in the future.

Potential competition from consumer-focused drone manufacturers is emerging as their capabilities increase and their prices remain low relative to existing defense solutions, which is resulting in some level of military consideration even if such drones do not meet traditional military performance or security specifications.

The HAPS UAS market is in an early stage of development and our HAPS UAS faces competition from several aerospace and defense contractors and internet technology companies pursuing the high altitude long endurance UAS market for global communication and remote sensing, including The Boeing Company, Airbus, Lockheed Martin Corporation and Northrop Grumman Corporation, and competition from companies pursuing alternative solutions for this market such as Lockheed Martin Corporation and Northrop Grumman Corporation with airships (high altitude aircraft that are kept buoyant by a body of gas that is lighter than air) and companies pursuing conventional satellites and LEO micro or cubesat satellite constellations.

Our tactical missile systems business faces competition from competitors including Textron Inc., Raytheon Technologies and Lockheed Martin Corporation.

Our competitors in the U.S.

defense market for UGVs include L3 Harris Technologies, Inc., Teledyne Technologies, Inc., QinetiQ North America, Inc., Peraton/Remotec, ICOR and Boston Dynamics.

aircraft that are kept buoyant by a body of gas that is lighter than air) and companies pursuing conventional satellites and LEO micro or cubesat satellite constellations.

Our TMS business faces competition from competitors including Textron Inc., Raytheon Technologies and Lockheed Martin Corporation.

Some of these firms have substantially greater financial, management, research and marketing resources than we have.

Our UAS services business also faces competition from smaller businesses that can provide training and logistics services for multiple UAS platforms, including our small UAS.

Our UAS services business also faces competition from smaller businesses that can provide training and logistics services for multiple UAS platforms, including our small and medium UAS.

Our competitors may be able to provide customers with different or greater capabilities or benefits than we can provide in areas such as technical qualifications, past contract performance, geographic presence, price and the availability of key professional personnel, including those with security clearances.

1 unchanged sentence

Small business competitors may be able to offer more cost competitive solutions, due to their lower overhead costs, and take advantage of small business incentive and set-aside programs for which we are ineligible.

The market for small UAS and services is expanding, and competition intensifying as additional competitors enter the market and current competitors expand their product lines.

The market for small UAS and UGV products and services is expanding, and competition intensifying as additional competitors enter the market and current competitors expand their product lines.

In order to secure contracts successfully when competing with larger, well-financed companies, we may be forced to agree to contractual terms that provide for lower aggregate payments to us over the life of the contract, which could adversely affect our margins.

1 unchanged sentence

Our failure to compete effectively with respect to any of these or other factors could have a material adverse effect on our business, prospects, financial condition or operating results.

If the UAS, tactical missile systems, and commercial UAS markets do not experience significant growth, if we cannot expand our customer base or if our products do not achieve broad acceptance, then we may not be able to achieve our anticipated level of growth.

We cannot accurately predict the future growth rates or sizes of the markets for our products.

Demand for our products may not increase, or may decrease, either generally or in specific markets, for particular types of products or during particular time periods.

If the UAS, UGV, TMS, and commercial UAS markets do not experience significant growth, if we cannot expand our customer base or if our products and services do not achieve broad acceptance, then we may not be able to achieve our anticipated level of growth.

We cannot accurately predict the future growth rates or sizes of the markets for our products and services.

Demand for our products and services may not increase, or may decrease, either generally or in specific markets, for particular types of products and services or during particular time periods.

We believe the market for commercial UAS is nascent.

Moreover, there are only a limited number of major programs under which the U.S.

military, our primary customer, is currently funding the development or

purchase of our UAS and tactical missile systems.

Although we have expanded our UAS customer base to include foreign governments, and domestic non-military agencies, we cannot assure you that our continued efforts to further increase our sales to these customers will be successful.

The expansion of the UAS, tactical missile systems, and commercial UAS markets in general, and the market for our products in particular, depends on a number of factors, including the following:

military, our primary customer, is currently funding the development or purchase of our UAS, UGV and TMS.

Although we have expanded our UAS customer base to include foreign governments and domestic non-military agencies, and made our first approved export of our tactical missile systems to a foreign customer, we cannot assure you that our continued efforts to further increase our sales to international customers will be successful.

The expansion of the UAS, UGV, TMS, and commercial UAS markets in general, and the market for our products and services in particular, depends on a number of factors, including the following:

● customer satisfaction with these types of systems as solutions;

1 unchanged sentence

● customer perceptions regarding the effectiveness and value of these types of systems;

● limitations on our ability to market our UAS and tactical missile systems products and services outside the United States due to U.S.

● limitations on our ability to market our UAS and TMS products and services outside the United States due to U.S.

government regulations;

● obtaining timely regulatory approvals, including, with respect to our small UAS business, access to airspace and wireless spectrum;

● marketing efforts and publicity regarding these types of systems.

Even if UAS, tactical missile systems, and commercial UAS gain wide market acceptance, our products may not adequately address market requirements and may not continue to gain market acceptance.

If these types of systems generally, or our products specifically, do not gain wide market acceptance, then we may not be able to achieve our anticipated level of growth and our revenue and results of operations would decline.

● obtaining timely regulatory approvals, including, with respect to any of our unmanned systems, access to airspace and wireless spectrum;

● marketing efforts and publicity regarding these types of systems and services.

Even if UAS, UGV, TMS, and commercial UAS gain wide market acceptance, our products and services may not adequately address market requirements and may not continue to gain market acceptance.

If these types of systems generally, or our products and services specifically, do not gain wide market acceptance, then we may not be able to achieve our anticipated level of growth and our revenue and results of operations would decline.

Our international business poses potentially greater risks than our domestic business.

1 unchanged sentence

government foreign military sales in which an end user is a foreign government, during the fiscal year ended April 30, 2021 compared to 45% for the fiscal year ended April 30, 2020.

We expect to continue to derive a significant portion of our revenue from international sales.

We expect to continue to derive a significant portion of our revenue from international sales, and have now initiated international operations with the acquisition of Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company (“Telerob”).

Our international revenue and operations are subject to a number of material risks, including the following:

4 unchanged sentences

● the complexities of operating a business in an international location through a subsidiary or joint venture structure that may include foreign business partners, subcontractors and suppliers;

● the complexities of managing a workforce under foreign labor and employment law and related organizational requirements;

● the complexity of shipping our products internationally through multiple jurisdictions with varying legal requirements;

8 unchanged sentences

● the imposition of tariffs, embargoes, export controls and other trade restrictions;

● different and changing legal and regulatory requirements, including those pertaining to anti-corruption, anti-boycott, data protection and privacy, employment law, intellectual property and contracts in the jurisdictions in which we currently operate or may operate in the future.

Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations.

While we have adopted policies and procedures to facilitate compliance with laws and regulations applicable to our international sales, our failure, or the failure by our employees or others working on our behalf, to comply with such laws and regulations may result in administrative, civil or criminal liabilities, including fines, suspension or debarment from government contracts or suspension of our export privileges.

● different and changing legal and regulatory requirements, including those pertaining to anti-corruption, anti-boycott, data protection and privacy, employment law, intellectual property, contracts and tax in the jurisdictions in which we currently operate or may operate in the future.

Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, destabilization of performance, difficulty in collecting receivables and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations.

While we have adopted policies and procedures to

facilitate compliance with laws and regulations applicable to our international operations and sales, our failure, or the failure by our employees or others working on our behalf, to comply with such laws and regulations may result in administrative, civil or criminal liabilities, including fines, suspension or debarment from government contracts or suspension of our export privileges.

Moreover, our sales, including sales to customers outside the United States, substantially all are denominated in U.S.

1 unchanged sentence

dollar may make our products more expensive than other products, which could harm our business.

We could be prohibited from shipping our products to certain countries if we are unable to obtain U.S.

government authorization regarding the export of our products, or if current or future export laws limit or otherwise restrict our business.

In addition, failure to comply with export laws could result in fines, export restrictions and other sanctions and penalties.

We must comply with U.S.

and other laws regulating the export of our products.

In some cases, explicit authorization from the relevant U.S.

government authorities is needed to export our products.

The export regulations and the governing policies applicable to our business are subject to change.

We cannot provide assurance that such export authorizations will be available for our products in the future.

Compliance with these laws has not significantly limited our operations or our sales in the recent past, but could significantly limit them in the future.

We maintain an export compliance program but there are risks that our compliance controls may be ineffective.

In November 2019, we entered into a consent agreement (the “Consent Agreement”) with the U.S.

Department of State’s Directorate of Defense Trade Controls Office of Defense Trade Controls Compliance to resolve various alleged violations of the Armed Export Control Act and the International Traffic in Arms Regulations (“ITAR”) that occurred between June 2014 and December 2016.

The Consent Agreement has a two-year term and provides for, among other things:

(i) a civil penalty of $1,000,000 payable in installments, $500,000 of which is suspended on the condition that such amount is used for future remedial compliance costs over the term of the Consent Agreement and/or credited against prior compliance enhancement costs already expended by us;

(ii) the appointment of an external Special Compliance Officer for a minimum of one year to oversee our compliance with the Consent Agreement and ITAR;

and (iii) one external audit of our compliance with the Consent Agreement and ITAR.

We expect that the $500,000 suspension amount will be satisfied by our past and future compliance program remediation efforts.

Our failure to comply with the terms of the Consent Agreement or export laws and regulations in general can subject us to additional fines, penalties and sanctions, including suspension of export privileges, which could have a material adverse impact on our business, operations and financial condition and limit or prevent us from being able to sell our products in certain international jurisdictions.

If we are unable to manage the increasing complexity of our business or achieve or manage our expected growth, our business could be adversely affected.

1 unchanged sentence

We have expanded the number of product lines being pursued, shifting from primarily a U.S.

government focused business to a business that includes substantial international product sales and added commercial services and formed a joint venture with SoftBank

government focused business to a business that includes substantial international product sales and added commercial services and formed a joint venture with SoftBank Corp.

to develop HAPS UAS.

We also acquired Pulse Aerospace, LLC, a Kansas-based developer of UAS capable of vertical take-off and landing (VTOL), in June 2019.

We also acquired Pulse Aerospace, LLC, a Kansas-based developer of UAS capable of VTOL, in June 2019, followed by acquisitions of Arcturus, which designs, engineers, tools, manufactures and provides UAS and related products and services, and certain assets of the Intelligent Systems Group business segment (“ISG”) of Progeny Systems Corporation, which develops artificial intelligence-enabled computer vision, machine learning and perceptive autonomy technologies and provides related services, in February 2021.

Additionally, in May 2021, we acquired Telerob, which develops, manufactures, sells, and services remote-controlled unmanned ground robots and transport vehicles for civil and defense applications.

Further, in conjunction with the acquisition of Arcturus, we entered into certain credit facilities that include affirmative and negative covenants and place some restrictions on how we operate our business.

These have increased complexity and our expected growth has placed, and will continue to place, a strain on our management and our administrative, operational and financial infrastructure.

We anticipate further growth of headcount and facilities will be required to address expansion in our product offerings and the geographic scope of our customer base.

We anticipate further growth of headcount and facilities will be required to address expansion in our product and service offerings and the geographic scope of our customer base.

However, if we are unsuccessful in our efforts, our business could decline.

5 unchanged sentences

Any efforts to expand our offerings beyond our current markets may not succeed, which could negatively impact our operating results.

Until recently, we have focused on selling our small UAS to the U.S.

We have, however, expanded our small UAS sales into other government and commercial markets, including the launch of VAPOR helicopter unmanned aircraft system, and formed a joint venture with SoftBank Corp.

military represents our largest source of revenue.

We have, however, expanded our product sales into market segments, including those served by our unmanned ground vehicle product line and by our joint venture with SoftBank Corp.

to develop HAPS UAS for global communication and remote sensing applications.

1 unchanged sentence

The markets in which we compete are characterized by rapid technological change, which requires us to develop new products and product enhancements, and could render our existing products obsolete.

Continuing technological changes in the market for our products could make our products less competitive or obsolete, either generally or for particular applications.

Continuing technological changes in the market for our products could make our products and services less competitive or obsolete, either generally or for particular applications.

Our future success will depend upon our ability to develop and introduce a variety of new capabilities and enhancements to our existing product offerings, as well as introduce a variety of new product offerings, to address the changing needs of the markets in which we offer our products.

Delays in introducing new products and enhancements, the failure to choose correctly among technical alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to purchase our competitors’ products.

Delays in introducing new products and enhancements, the failure to choose correctly among technical

alternatives or the failure to offer innovative products or enhancements at competitive prices may cause existing and potential customers to purchase our competitors’ products.

If we are unable to devote adequate resources to develop new products or cannot otherwise successfully develop new products or enhancements that meet customer requirements on a timely basis, our products could lose market share, our revenue and profits could decline, and we could experience operating losses.

5 unchanged sentences

Because we account for internal research and development as an operating expense, these expenditures will adversely affect our earnings in the future.

Further, our research and development programs may not produce

successful results, and our new products and services may not achieve market acceptance, create additional revenue or become profitable, which could materially harm our business, prospects, financial results and liquidity.

Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies, or limitations put on the use of small UAS in response to public privacy concerns, may prevent us from expanding the sales of our small UAS to non-military customers in the United States.

The regulation of small UAS for commercial use in the United States is undergoing substantial change and the ultimate treatment is uncertain.

In 2006, the FAA issued a clarification of its existing policies stating that, in order to engage in commercial use of small UAS in the U.S.

National Airspace System, a public operator must obtain a COA from the FAA, or fly in restricted airspace.

The FAA’s COA approval process requires that the public operator certify the airworthiness of the aircraft for its intended purpose, that a collision with another aircraft or other airspace user is extremely improbable, that the small unmanned aircraft system complies with appropriate cloud and terrain clearances and that the operator or spotter of the small unmanned aircraft system is generally within one half-mile laterally and 400 feet vertically of the small unmanned aircraft system while in operation.

Furthermore, the FAA’s clarification of existing policy stated that the rules for radio-controlled hobby aircraft do not apply to public or commercial use of small UAS.

On February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing various deadlines for the FAA to allow expanded use of small UAS for both public and commercial applications.

On June 21, 2016, the FAA released its final rules regarding the routine use of certain small UAS (under 55 pounds) in the U.S.

National Airspace System pursuant to the act (the “Part 107 Rules”).

The Part 107 Rules, which became effective in August 2016, provided safety regulations for small UAS conducting non- recreational operations and contain various limitations and restrictions for such operations, including a requirement that operators keep UAS within visual-line-of-sight and prohibiting flights over unprotected people on the ground who are not directly participating in the operation of the UAS.

Additionally, in December 2019 and January 2020, the FAA proposed rules regarding remote UAS identification and a new policy regarding the airworthiness certification of a newly created special class of UAS.

It is unclear when, if ever, the FAA will implement any final rules regarding remote UAS identification and whether such final rules will differ from the proposed rules or when, if ever, the FAA will create a new class of UAS and what the final rules regarding the certification of such new class of UAS will state.

We cannot assure you that the Part 107 Rules, or any final rules enacted in furtherance on the FAA’s recently announced proposals, will result in the expanded use of our small UAS by law enforcement or other non-military government agencies or commercial entities and we may not be able to expand our sales of small UAS beyond our military customers, which could harm our business prospects.

In addition, there exists public concern regarding the privacy implications of U.S.

commercial and law enforcement use of small UAS.

This concern has included calls to develop explicit written policies and procedures establishing usage limitations.

We cannot assure you that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of small UAS by non-military customers.

Further, our research and development programs may not produce successful results, and our new products and services may not achieve market acceptance, create additional revenue or become profitable, which could materially harm our business, prospects, financial results and liquidity.

Our products and services are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes.

Our UAS rely on complex avionics, sensors, user-friendly interfaces and tightly-integrated, electromechanical designs to accomplish their missions.

Our products rely on complex avionics, sensors, user-friendly interfaces and tightly-integrated, electromechanical designs to accomplish their missions.

Despite testing, our products have contained defects and errors and may in the future contain defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products have been used by our customers for a period of time.

2 unchanged sentences

The existence of any defects, errors, or failures in our products or the misuse of our products could also lead to product liability claims or lawsuits against us.

A defect, error or failure in one of our UAS could result in injury, death or property damage and significantly damage our reputation and support for our UAS in general.

We anticipate this risk

will grow as our UAS begin to be used in U.S.

A defect, error or failure in one of our products could result in injury, death or property damage and significantly damage our reputation and support for our products in general.

We anticipate this risk will grow as our products begin to be used in U.S.

domestic airspace and urban areas.

9 unchanged sentences

In addition, certain raw materials and components used in the manufacture of our products and in our development programs are periodically subject to supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery.

Particularly, the market for electronic components is experiencing increased demand, creating substantial uncertainty regarding our suppliers’ continued production of key components for our products.

If we are unable to obtain components from third party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may not be able to timely complete development programs or deliver our products on a timely or cost effective basis to our customers, which could cause customers to terminate their contracts with us, increase our costs and seriously harm our business, results of operations and financial condition.

Particularly, the market for electronic components is experiencing increased demand and a global shortage of semiconductors, creating substantial uncertainty regarding our suppliers’ continued production of key components for our products.

In the fourth quarter of our fiscal year ended April 30, 2021, we experienced shortages of certain components for our TMS product line, which caused short term delays in production and negatively affected our revenue for our fourth quarter and fiscal year ended April 30, 2021.

If any additional shortages occur and we are unable to obtain components from third party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may not be able to timely complete development programs or deliver our products on a timely or cost effective basis to our customers, which could cause customers to terminate their contracts with us, increase our costs and seriously harm our business, results of operations and financial condition.

Moreover, if any of our suppliers become financially unstable, or otherwise unable or unwilling to provide us with raw materials or components, then we may have to find new suppliers.

4 unchanged sentences

Although we have not yet seen significant delays from our suppliers and we keep stock of all our raw materials and other product components with long lead times to assist in the event that our supply chain is disrupted, if the COVID-19 outbreak continues and results in a prolonged period of commercial and/or governmental restrictions, this may impact our ability to obtain certain raw materials and certain components used in the manufacture of our products and in our development programs.

Earnings and cash flows can be impacted by changes in tax laws.

As a U.S.-based multinational business, we are subject to income tax in the U.S.

and numerous jurisdictions outside the U.S.

The relevant tax rules and regulations are complex, often changing and, in some cases, are interdependent.

If these or other tax rules and regulations should change, the company’s earnings and cash flows could be impacted.

In particular, the changes proposed by the new U.S.

administration, including increasing the U.S.

corporate income tax rate from 21% to 28%, doubling the rate of tax on certain earnings of non-U.S.

subsidiaries and the imposition of a 15% minimum tax on worldwide book income, could materially affect the company’s financial results if enacted.

The company’s worldwide provision for income taxes is determined, in part, through the use of significant estimates and judgments.

Numerous transactions arise in the ordinary course of business where the ultimate tax determination is uncertain.

The company undergoes tax examinations by tax authorities on a regular basis.

While the company believes its estimates of its tax obligations are reasonable, the final outcome after the conclusion of any tax examinations and any litigation could be materially different from what has been reflected in the company’s historical financial statements.

Our earnings and profit margins may decrease based on the mix of our contracts and programs and other factors related to our contracts.

1 unchanged sentence

Under fixed-price contracts, we perform services under a contract at a stipulated price.

Under cost-plus-fee contracts, which are subject to a contract ceiling amount, we are

reimbursed for allowable costs and paid a fee, which may be fixed or performance based.

Under cost-plus-fee contracts, which are subject to a contract ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based.

We typically experience lower profit margins under cost-plus-fee contracts than under fixed-price contracts, though fixed-price contracts involve higher risks.

16 unchanged sentences

Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards.

Our senior management and key employees are important to our customer relationships and overall business.

Our senior management and key employees, including key employees of business recently acquired, are important to our customer relationships and overall business.

We believe that our success depends in part on the continued contributions of our senior management and key employees.

2 unchanged sentences

We do not have employment agreements with any of our executive officers or key employees, and these individuals could terminate their employment with us at any time.

The loss of any of our executive officers, members of our senior management team or key employees could significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new contracts and otherwise manage our business.

loss of any of our executive officers, members of our senior management team or key employees could significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships and impair our ability to identify and secure new contracts and otherwise manage our business.

We must recruit and retain highly-skilled employees to succeed in our competitive business.

6 unchanged sentences

In the event we are unable to provide these key personnel or acceptable substitutes, the customer may terminate the contract.

Our business may be dependent upon our employees obtaining and maintaining required security clearances, as well as our ability to obtain security clearances for the facilities in which we perform sensitive government work.

Certain of our U.S.

government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with DoD requirements.

The DoD has strict security clearance requirements for personnel who work on classified programs.

Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances.

If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain the clearances or terminate employment with us, then a customer requiring classified work could terminate the contract or decide not to renew it upon its expiration.

In addition, we expect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility security clearances and employ personnel with specified types of security clearances.

To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts.

Our future profitability may be dependent upon achieving cost reductions and projected economies of scale from increasing manufacturing quantities of our products.

Failing to achieve such reductions in manufacturing costs and projected economies of scale could materially adversely affect our business.

We have limited experience manufacturing small UAS and tactical missile systems in high volume.

We have limited experience manufacturing UAS and UGV in high volume.

We do not know whether or when we will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable us to manufacture (or contract for the manufacture of) these products in commercial quantities while meeting the volume, speed, quality, price, engineering, design and production standards required to successfully market our products.

9 unchanged sentences

As such, we are subject to significant risks in managing the inventory needs of our business during the year, including estimating the appropriate demand for our products.

Should orders and market conditions differ significantly from our estimates, our future results of operations

could be materially adversely affected.

Should orders and market conditions differ significantly from our estimates, our future results of operations could be materially adversely affected.

In the future, we may be required to record write-downs of finished products and materials on-hand and/or additional charges for excess purchase commitments as a result of future changes in our sales forecasts or customer orders.

2 unchanged sentences

From time to time, these activities may result in incidents that could cause us to temporarily shut down or otherwise disrupt some manufacturing processes, causing production delays and resulting in liability for workplace injuries and/or fatalities.

We have safety and loss prevention programs that require detailed reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies, however our insurance coverage may be inadequate to cover all claims and losses related to such incidents.

We have safety and loss prevention programs that

require detailed reviews of process changes and new operations, along with routine safety audits of operations involving explosive materials, to mitigate such incidents, as well as a variety of insurance policies, however our insurance coverage may be inadequate to cover all claims and losses related to such incidents.

We may experience such incidents in the future, which could result in production delays or otherwise have a material adverse effect on our business and financial condition.

6 unchanged sentences

The risks or limitations of operating UAS in urban environments may limit their value in such environments, which may limit demand for our UAS and consequently materially harm our business and operating results.

As a manufacturer of commercial UAS, we are subject to various government regulations and may be subject to additional regulations in the future, violation of which could subject us to sanctions or otherwise harm our business.

As a manufacturer of consumer products, we are subject to significant government regulations, including, in the United States, those issued under the Consumer Products Safety Act, as well as those issued under product safety and consumer protection statutes in our international markets.

Failure to comply with any applicable product safety or consumer protection regulation could result in sanctions that could have a negative impact on our business, financial condition and results of operations.

Governments and regulatory agencies in the markets where we manufacture and sell products may enact additional regulations relating to product safety and consumer protection in the future, and may also increase the penalties for failure to comply with product safety and consumer protection regulations.

In addition, one or more of our customers might require changes in our products, such as the non-use of certain materials, in the future.

Complying with any such additional regulations or requirements could impose increased costs on our business.

Similarly, increased penalties for non-compliance could subject us to greater expenses in the event any of our products were found to not comply with such regulations.

Such increased costs or penalties could harm our business.

We could be the subject of future product liability suits or product recalls, which could harm our business.

We may be subject to involuntary product recalls or may voluntarily conduct a product recall.

The costs associated with any future product recalls could be significant.

In addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of our products and have a negative impact on our future revenues and results of operations.

Subject to a determination of the appropriateness of any recall, we remain responsible for the non-

warranty costs from the recall of completed products we manufactured, sold or serviced prior to closing of the sale of substantially all of the assets and related liabilities of our EES Business to Webasto, pursuant to an Asset Purchase Agreement (the “Purchase Agreement”).

In particular, on August 24, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration (“NHTSA”) that named us as a brand of the affected equipment.

To the extent we are obligated under the terms of the Purchase Agreement with Webasto or as a result of the lawsuit filed by Webasto against us seeking costs related to the recall or pursuant to applicable law for all or any portion of the costs incurred in connection with such recall, or any other such recall, our results of operations may be negatively affected.

In addition to government regulation, products that have been or may be developed by us may expose us to potential liability from personal injury or property damage claims by the users of such products.

There can be no assurance that a claim will not be brought against us in the future, regardless of merit.

While we maintain insurance coverage for product liability claims, our insurance may be inadequate to cover any such claims.

Any successful claim could significantly harm our business, financial condition and results of operations.

We are subject to pending legal proceedings that may disrupt our business, cause us to incur substantial costs, expose us to significant legal liabilities and could have a material adverse impact on our financial performance.

We are subject to various legal proceedings and claims, including a lawsuit filed by Webasto alleging several claims against us arising out of or related to our sale of our EES Business to Webasto in June 2018 and the NHTSA recall.

Additional lawsuits may arise in the future.

Occasionally we are also involved in governmental inquiries and investigations and administrative and regulatory proceedings.

Our activities relating to defending and responding to any such proceedings may result in substantial legal expenses, may disrupt our sales and marketing or other business activities, including our relationships with our customers, suppliers, employees and other third parties, and divert management’s and our employees’ attention from our day-to-day operations, which may have an adverse impact on our financial performance.

The results of any such proceedings are unpredictable.

We record accruals for liabilities where we believe a loss is probable and reasonably estimable, however, our actual losses may differ significantly from our estimates.

An adverse or unfavorable resolution of any proceedings against us could have a material impact on our financial position, cash flows and results of operations.

Our quarterly operating results may vary widely.

3 unchanged sentences

government’s fiscal year end, which may affect our quarterly operating results;

● the mix of products that we sell in the period;

● the mix of products and services that we sell in the period;

● fluctuations in customer demand for some of our products or services;

● unanticipated costs incurred in the introduction of new products;

● fluctuations in the adoption of our products in new markets;

● unanticipated costs incurred in the introduction of new products and services;

● fluctuations in the adoption of our products and services in new markets;

● our ability to win additional contracts from existing customers or other contracts from new customers;

10 unchanged sentences

Shortfalls in available external research and development funding could adversely affect us.

We depend on our research and development activities to develop the core technologies used in our UAS products and for the development of our future products.

We depend on our research and development activities to develop the core technologies used in our products and for the development of our future products.

A portion of our research and development activities depends on funding by commercial companies and the U.S.

18 unchanged sentences

Despite these precautions, the safety of our personnel in these locations may continue to be at risk, and we may in the future be negatively impacted by the loss of employees and contractors, which could harm our business and operating results.

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.

We operate in emerging and rapidly evolving markets, which makes our prospects difficult to evaluate.

It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs.

If this occurs, then we may need additional financing to pursue our business strategies, including to:

● hire additional engineers and other personnel;

● develop new or enhance existing products;

● enhance our operating infrastructure;

● fund working capital requirements;

● acquire complementary businesses or technologies;

● otherwise respond to competitive pressures.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders.

We cannot assure you that additional financing will be available on terms favorable to us, or at all.

Our former line of credit contained, and future debt financing may contain, covenants or other provisions that limit our operational or financial flexibility.

In addition, certain of our customers require that we obtain letters of credit to support our obligations under some of our contracts.

Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of our portfolio investments and in interest rates.

4 unchanged sentences

government securities, U.S.

government agency securities, municipal bonds and high-grade corporate bonds, the performance of which are subject to additional market risks related to their respective issuers.

government agency securities, municipal bonds and high-grade corporate

bonds, the performance of which are subject to additional market risks related to their respective issuers.

Nearly all of our cash and bank deposits are not insured by the Federal Deposit Insurance Corporation.

Therefore, our cash and any bank deposits that we now hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value or liquidity.

In the future, should we determine that there is a decline in value of any of our portfolio securities which is not temporary in nature, this would result in a loss being recognized in our consolidated statements of income.

Our investments are classified as available-for-sale and recorded at fair value each reporting period.

Unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

2 unchanged sentences

Our general business strategy may be adversely affected by any economic downturn, volatile business environment or continued unpredictable and unstable market conditions.

If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly and more dilutive.

Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial

performance and stock price and could require us to delay or abandon implementing business initiatives.

If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, costlier and more dilutive.

Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon implementing business initiatives.

These events and the continuing market upheavals could adversely affect our business in a number of ways, including:

17 unchanged sentences

Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.

In June 2019, we consummated the acquisition of Pulse Aerospace, LLC, a Kansas based developer of VTOL UAS.

In June 2019, we consummated the acquisition of Pulse Aerospace, LLC.

In February 2021 we completed the acquisition of Arcturus and ISG, and in May 2021 we acquired Telerob.

We intend to consider additional acquisitions that could add to our customer base, technological capabilities or system offerings.

Acquisitions, including the acquisition of Pulse Aerospace, involve numerous risks, any of which could harm our business, including the following:

● difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company and realizing the anticipated synergies of the combined businesses;

● difficulties in supporting and transitioning customers, if any, of the target company;

Acquisitions, including our recent

acquisitions of Arcturus, ISG and Telerob, involve numerous risks, any of which could harm our business, including the following:

● difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of each target company and realizing the anticipated synergies of the combined businesses;

● difficulties in supporting and transitioning customers, if any, of each target company;

● diversion of financial and management resources from existing operations;

● the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

● risks of entering new markets in which we have limited or no experience;

● risks of entering new markets in which we have limited or no experience the complexities of managing a workforce under foreign labor and employment law and related organizational requirements;

● potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business;

● assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s products or its regulatory compliance;

● expanded regulatory compliance complexity and risk;

● inability to generate sufficient revenue to offset acquisition costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results.

In addition, if we finance acquisitions by issuing equity, or securities convertible into equity, then our existing stockholders may be diluted, which could lower the market price of our common stock.

If we finance acquisitions through debt, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility.

In addition, if we finance acquisitions by issuing equity, or securities convertible into equity, such as the stock issued as consideration for the purchase of Arcturus, then our existing stockholders may be diluted, which could lower the market price of our common stock.

If we finance acquisitions through debt, such as the credit facilities we entered into in connection with the consummation of our acquisition of Arcturus, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility.

If we fail to properly evaluate acquisitions or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate.

The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

Environmental laws and regulations and unforeseen costs could impact our future earnings.

The manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations.

For example, we obtain a significant number of our electronics components from companies located in East Asia, where environmental rules may be less stringent than in the United States.

Over time, the countries where these companies are located may adopt more stringent environmental regulations, resulting in an increase in our manufacturing costs.

Given the increasing focus on environmental compliance by regulators and the general public, any incidence of non-compliance could result in damage to our reputation beyond the fines and other sanctions that could be imposed.

Furthermore, certain environmental laws, including the U.S.

Comprehensive, Environmental Response, Compensation and Liability Act of 1980, impose strict, joint and several liability on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and impose liability for damages to natural resources.

These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances.

These environmental laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatment facilities when such facilities are later found to be contaminated.

Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility.

Although we have never been named a responsible party at a contaminated site, we could be named a potentially responsible party in the future.

We cannot assure you that such existing laws or future laws will not have a material adverse effect on our future earnings or results of operations.

Our business is subject to federal, state and international laws regarding data protection, privacy, and information security, as well as confidentiality obligations under various agreements, and our actual or perceived failure to comply with such obligations could damage our reputation, expose us to litigation risk and adversely affect our business and operating results.

In connection with our business, we receive, collect, process and retain certain sensitive and confidential customer information.

As a result, we are subject to increasingly rigorous federal, state and international laws regarding privacy and data protection.

Personal privacy, data protection and information security are significant issues in the United States and the other jurisdictions where we offer our products and services.

The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future.

Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, including the United States Federal Trade Commission (“FTC”) and various state, local and foreign bodies and agencies.

We also execute confidentiality agreements with various parties under which we are required to protect their confidential information.

The United States federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of personal information of individuals, including end-customers and employees.

In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of data.

Additionally, many foreign countries and

governmental bodies, and other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection and use of personal information obtained from their residents or by businesses operating within their jurisdiction.

These laws and regulations often are more restrictive than those in the United States.

Such laws and regulations may require companies to implement new privacy and security policies, permit individuals to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes.

We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact of such future laws, regulations and standards may have on our business.

For example, the California Consumer Privacy Act, which became effective in 2020, provides new data privacy rights for consumers and new operational requirements for companies.

Additionally, we expect that existing laws, regulations and standards may be interpreted differently in the future.

There remains significant uncertainty surrounding the regulatory framework for the future of personal data transfers from the European Union to the United States with regulations such as the recently adopted General Data Protection Regulation (“GDPR”), which imposes more stringent E.U.

data protection requirements, provides an enforcement authority, and imposes large penalties for noncompliance.

Future laws, regulations, standards and other obligations, including the adoption of the GDPR, as well as changes in the interpretation of existing laws, regulations, standards and other obligations could impair our ability to collect, use or disclose information relating to individuals, which could decrease demand for our products, require us to restrict our business operations, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.

Although we are working to comply with those federal, state and foreign laws and regulations, industry standards, contractual obligations and other legal obligations that apply to us, such laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another, other requirements or legal obligations, our practices or the features of our products.

As such, we cannot assure ongoing compliance with all such laws or regulations, industry standards, contractual obligations and other legal obligations, and our efforts to do so may cause us to incur significant costs or require changes to our business practices, which could adversely affect our business and operating results.

Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards, contractual obligations or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personal information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business and operating results.

Compliance with the SEC’s conflict minerals regulations may increase our costs and adversely impact the supply-chain for our UAS products.

In August 2012, the SEC adopted disclosure rules regarding a company’s use of conflict minerals in its products with substantial supply chain verification requirements in the event that the conflict minerals come from, or could have come from, the Democratic Republic of the Congo or adjoining countries.

These rules and verification requirements have imposed additional costs on us and on our suppliers, including costs related to determining the source of conflict minerals used in our products, which may adversely affect our results of operations.

We are dependent on information supplied by our first tier suppliers in conducting due diligence into the origins of conflict minerals in our products and in complying with our SEC reporting obligations.

To the extent that information we receive from our suppliers is inaccurate or inadequate, we may not be able to determine whether our products are conflict mineral-free.

We may face challenges in satisfying our customers who may require that our products be certified as conflict mineral-free, which could place us at a competitive disadvantage and could harm our business.

These regulations could also have the effect of limiting the pool of suppliers from which we source items containing conflict minerals, and we may be unable to obtain conflict-free minerals at competitive prices, if at all, which could increase our costs and adversely affect our results of operations.

Borrowings under our credit facilities could adversely affect our financial condition and restrict our operating flexibility.

On February 19, 2021, in connection with the consummation of the Arcturus acquisition, we entered into a credit agreement with certain lenders, letter of credit issuers, and others (the “Credit Agreement”), which, together with its associated Security and Pledge Agreement, sets forth the terms and conditions of a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit (the “Revolving Facility”), and a five-year amortized $200 million term A loan (the “Term Loan Facility”, and together with the Revolving Facility, the “Credit Facilities”).

Upon execution of the Credit Agreement, we drew down $200.0 million, the full principal amount of the Term Loan Facility, to partially finance the acquisition of Arcturus.

The Term Loan Facility has a five-year term expiring in February 2026 and bears interest, at our option, either at a LIBOR rate or a base rate plus a fixed applicable margin dependent on our consolidated leverage ratio under the terms of the agreement.

We are required to pay 5.0% of the outstanding obligations under the Term Loan Facility in each of the first four loan years, with the remaining 80.0% payable in the fifth loan year, consisting of three quarterly

payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the maturity date.

The Revolving Facility has a term of 5 years.

As of April 30, 2021 we have only letters of credit issued pursuant to the Revolving Facility, totaling $5.0 million.

In support of our obligations under the Credit Facilities, we have granted security interests in substantially all of our personal property and that of our domestic subsidiaries, including a pledge of the equity interests in our subsidiaries (limited to 65% of outstanding equity interests in the case of our foreign subsidiaries), subject to customary exclusions and exceptions.

In addition, our domestic subsidiaries, including Arcturus, are required to be guarantors of the Credit Facilities.

In addition, our increased level of indebtedness may have important consequences to us, including:

● increasing our vulnerability to adverse general economic and industry conditions;

● requiring us to dedicate a portion of our cash flows to the payment of interest and when applicable, principal, on our indebtedness and other obligations thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy, acquisitions and other general corporate purposes;

● limiting our flexibility in planning for, or reacting to, changes in the economy, the defense industry, and the markets in which we operate;

● subjecting us to maintenance of various financial covenants and adherence to certain other affirmative and negative covenants, requiring us to seek lender consent or waiver in relation to our financial performance or other potential strategic actions in the future;

● placing us at a competitive disadvantage compared to our competitors with less indebtedness;

● exposing us to substantial interest rate risk due to the variable interest rate under the Credit Facilities, such that, if interest rates were to increase substantially during the term of the Credit Facilities, the resulting increase in our interest payment obligations could adversely affect our operating results and our ability to service the indebtedness under the Credit Facilities;

● making it more difficult for us to borrow additional funds in the future to fund our growth, acquisitions, working capital, capital expenditures, and other purposes.

To the extent we incur additional indebtedness, the risks described above could increase.

If we do not have sufficient funds to repay the Term Loan Facility when it becomes due in 2026, it may be necessary to refinance our debt through additional debt or equity financings.

If, at the time of any such refinancing, prevailing interest rates or other factors result in higher interest rates on such refinanced debt, such increases in our interest expense could have an adverse effect on our business, results of operations and financial condition.

The Credit Agreement contains customary events of default, upon the occurrence and during the continuation of which, after any applicable grace period, the lenders would have the ability to declare the loans due and payable in whole or in part.

Among other things, if we fail to make required debt payments, or if we fail to comply with financial or other covenants in the Credit Agreement, we would be in default under the terms thereof.

The Credit Agreement contains customary negative covenants that include, subject to customary exclusions:

● Restrictions on additional liens on our assets.

● Restrictions on incurring additional indebtedness.

● Restrictions on new investments, including acquisitions, mergers, investments in subsidiaries that are not guarantors of the debt, and joint ventures.

● Restrictions on disposal of assets.

● Restrictions on payments of cash dividends.

● Restrictions on changing the nature of our business.

● A requirement to maintain a maximum consolidated leverage ratio and a minimum fixed charge coverage ratio.

● Restrictions on changes to our accounting policies.

● Restrictions on payments of any junior indebtedness.

To the extent we would wish to engage in any of the prohibited behaviors, we would need to obtain consent under the Credit Agreement, which may not be timely forthcoming or at all.

If a default event were to occur, we may not have sufficient available cash to repay such outstanding debt obligations at the time they become due, or be able to refinance such debt on acceptable terms or at all.

Any of the foregoing limitations or events could materially and adversely affect our financial condition and results of operations.

Our business and operations are subject to the risks of earthquakes and other natural catastrophic events.

Our corporate headquarters, research and development and manufacturing operations are located in Southern California, a region known for seismic activity and wild fires.

The majority of our research and development and manufacturing operations are located in California, regions known for seismic activity and wild fires.

A significant natural disaster, such as an earthquake, fire or other catastrophic event, could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially and adversely affected.

3 unchanged sentences

Although our operations have mostly continued uninterrupted during the COVID-19 outbreak, adoption of work from home protocols, social distancing measures in the workplace and other responsive actions have required certain changes to our operations.

If the current COVID-19 outbreak continues and results in a prolonged period of travel and other similar logistics restrictions, this may reduce our and our customers’ capabilities to travel, domestically and internationally, which may impact our ability to perform certain contracts, develop and renew contracts, or market our products, or could otherwise disrupt portions of our business and have a material adverse effect on our results of operations.

Despite an increase in vaccinations in the United States, vaccinations have adopted more slowly internationally, and if the current COVID-19 pandemic continues and results in additional periods of travel and other similar logistics restrictions, this may further reduce our and our customers’ capabilities to travel, domestically and internationally, which may impact our ability to perform certain contracts, develop and renew contracts, or market our products, or could otherwise disrupt portions of our business and have a material adverse effect on our results of operations.

Global health concerns, such as coronavirus, could result in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate.

It is not currently possible to ascertain the overall impact of the COVID-19 outbreak, if any, on our business.

The extent to which COVID-19 impacts on our business, financial condition and results of operations and those of our third party partners will depend on future developments as to the geographic presence of COVID-19 and government and healthcare responses to such spread including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others, which are presently highly uncertain.

The extent to which COVID-19 impacts on our business, financial condition and results of operations and those of our third party partners will depend on future developments as to the geographic presence of COVID-19, rates of vaccination, government and healthcare responses to such spread including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others, which remain highly uncertain.

We cannot presently predict the scope and severity of any potential business disruptions, but if we or any of the third parties with whom we engage, including suppliers and other third parties with whom we conduct business, were to experience prolonged shutdowns or other business disruptions, including a slowdown in the effectiveness of our workforce due to illness or otherwise, our ability to conduct our business in the manner presently planned could be materially and negatively impacted.

The COVID-19 outbreak could also cause delays or limits in the ability of our customers to make timely payments and contract awards to us.

Additionally, our government customers may have more limited resources available to purchase our products due to deteriorating economic conditions or due to the diversion of resources to other budget priorities, including efforts to address the COVID-19 pandemic.

The COVID-19 outbreak has caused delays in the timing of our customers’ awarding of contracts to us, and while such delays have not yet had a significant impact on our business, there can be no assurances that any such delays would not have a material adverse impact on our business and results of operations in the future.

The COVID-19 pandemic could also cause delays or limits in the ability of our customers to make timely payments to us.

Additionally, our government customers may have more limited resources available to purchase our

products due to deteriorating economic conditions or due to the diversion of resources to other budget priorities, including efforts to address the COVID-19 pandemic.

The future progression of the COVID-19 outbreak and its resulting effects on our business, financial condition and results of operations are uncertain and are continuing to be assessed.

We self-insure a portion of our health insurance program which may expose us to unexpected costs and negatively affect our results of operations .

We are self-insured for employee medical claims, subject to individual and aggregate stop loss insurance policies.

We are self-insured for the majority of our employee medical claims, subject to individual and aggregate stop loss insurance policies.

We estimate a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by us.

2 unchanged sentences

Government Contracts

We are presently classified as a small business defense contractor and the loss of our small business status may adversely affect our ability to compete for small business set-aside US government contracts.

Because we have fewer than 1,500 employees, we are presently classified as a small business defense contractor under our primary North American Industry Classification Systems (“NAICS”) industry and product specific codes (336411 - Aircraft Manufacturing) which are regulated in the United States by the Small Business Administration (“SBA”).

Businesses that meet the small business size standard for the relevant NAICS code are able to bid on small business set-aside contracts.

While we do not presently derive a substantial portion of our business from contracts which are set-aside for small businesses, we are able to bid on small business set-aside contracts as well as contracts which are open to non-small business entities.

As we continue to grow and add employees, including through acquisitions, or if NAICS codes are revised, we could cease to qualify as a small business, which could adversely impact our eligibility for special small business programs and limit our ability to partner with other business entities that seek to team with small business entities as may be required under a specific contract.

If we outgrow our small business classification, we would not be eligible to serve as the prime contractor on small business set aside programs and may need to implement a small business subcontracting plan with other companies that qualify as a small business, for SBA approval.

The loss of our small business classification could have a material adverse effect on our financial position and/or results of operations.

Additionally, if we are no longer eligible for the small business exemption from compliance with the full range of Cost Accounting Standards (“CAS”), we would be required to demonstrate compliance with such standards upon the award of a contract subject to the full range of CAS, which will impose additional administrative costs on our business, and may significantly affect the manner in which we conduct our business with our customers and adversely affect our results of operations.

We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.

21 unchanged sentences

government agencies, primarily the DCAA and the DCMA, routinely audit and investigate government contractors.

These agencies review a contractor’s performance under its contracts, cost structure and compliance with

applicable laws, regulations and standards.

These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.

These agencies also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, quality, accounting, property, estimating, compensation and management information systems.

4 unchanged sentences

Our 2016 and 2017 rates claims were accepted without audit during the fiscal year ended April 30, 2019 without payment of any consideration.

During the fiscal year ended April 30, 2020, the Company settled rates for its incurred cost claims with the DCAA for fiscal year 2015 for an amount not significant.

During the fiscal year ended April 30, 2020, the Company settled rates for its incurred cost claims with the DCAA for fiscal year 2015 for an amount that was not significant.

At April 30, 2021 we had no reserve for open incurred cost claim audits.

31 unchanged sentences

Since a substantial majority of our revenue is dependent on the procurement, performance and payment under our U.S.

government contracts, the termination of one or more critical government contracts could have a negative impact on our results of operations and financial condition.

government contracts, the termination of one or more critical

government contracts could have a negative impact on our results of operations and financial condition.

Termination arising out of our default could result in damage to our reputation, expose us to liability and have a material adverse effect on our ability to re-compete for future contracts and orders.

7 unchanged sentences

government contracts that were awarded through a competitive bidding process.

Much of the UAS business that we expect to seek in the foreseeable future likely will be awarded through competitive bidding.

Much of the business that we expect to seek in the foreseeable future likely will be awarded through competitive bidding.

Competitive bidding presents a number of risks, including the following:

19 unchanged sentences

government contract awards in the future.

Risks Related to Legal and Regulatory Requirements

We could be prohibited from shipping our products to certain countries if we are unable to obtain U.S.

government authorization regarding the export of our products, or if current or future export laws limit or otherwise restrict our business.

In addition, failure to comply with export laws could result in fines, export restrictions and other sanctions and penalties.

We must comply with U.S.

and other laws regulating the export of our products.

In some cases, explicit authorization from the relevant U.S.

government authorities is needed to export our products.

The export regulations and the governing policies applicable to our business are subject to change.

We cannot provide assurance that such export authorizations will be available for our products in the future.

Compliance with these laws has not significantly limited our operations or our sales in the recent past, but could significantly limit them in the future.

We maintain an export compliance program but there are risks that our compliance controls may be ineffective.

In November 2019, we entered into a consent agreement (the “Consent Agreement”) with the U.S.

The Consent Agreement has a two-year term and provides for, among other things:

(i) a civil penalty of $1,000,000 payable in installments, $500,000 of which was suspended on the condition that such amount be used future remedial compliance costs over the term of the Consent Agreement and/or credited against prior compliance enhancement costs already expended by us;

(ii) the appointment of an external Special Compliance Officer for a minimum of one year to oversee our compliance with the Consent Agreement and ITAR;

and (iii) one external audit of our compliance with the Consent Agreement and ITAR.

The $500,000 suspension amount was satisfied by our compliance program remediation efforts during our fiscal year ended April 30, 2021.

Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies, or limitations put on the use of small and medium UAS in response to public privacy concerns, may prevent us from expanding the sales of our small and medium UAS to non-military customers in the United States.

The regulation of small and medium UAS for commercial use in the United States is undergoing substantial change and the ultimate treatment is uncertain.

In 2006, the FAA issued a clarification of its existing policies stating that, in order to engage in commercial use of small and medium UAS in the U.S.

National Airspace System, a public operator must obtain a COA from the FAA, or fly in restricted airspace.

Furthermore, the FAA’s clarification of existing policy stated that the rules for radio-controlled hobby aircraft do not apply to public or commercial use of small and medium UAS.

On February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing various deadlines for the FAA to allow expanded use of small and medium UAS for both public and commercial applications.

On June 21, 2016, the FAA released its final rules regarding the routine use of certain small UAS (under 55 pounds) in the U.S.

National Airspace System pursuant to the act (the “Part 107 Rules”).

The Part 107 Rules, which became effective in August 2016, provided safety regulations for small UAS conducting non-recreational operations and contain various limitations and restrictions for such operations, including a requirement that operators keep UAS within visual-line-of-sight and prohibiting flights over unprotected people on the ground who are not directly participating in the operation of the UAS.

final rules regarding the certification of such new class of UAS will state.

We cannot assure you that the Part 107 Rules, or any final rules enacted in furtherance on the FAA’s recently announced proposals, will result in the expanded use of our small and medium UAS by law enforcement or other non-military government agencies or commercial entities and we may not be able to expand our sales of small and medium UAS beyond our military customers, which could harm our business prospects.

In addition, there exists public concern regarding the privacy implications of U.S.

commercial and law enforcement use of small UAS.

This concern has included calls to develop explicit written policies and procedures establishing usage limitations.

We cannot assure you that the response from regulatory agencies, customers and privacy advocates to these concerns will not delay or restrict the adoption of small and medium UAS by non-military customers.

Certain of our U.S.

government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances complying with DoD requirements.

The DoD has strict security clearance requirements for personnel who work on classified programs.

Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold security clearances.

In addition, one or more of our customers might require changes in our products, such as the non-use of certain materials, in the future.

Complying with any such additional regulations or requirements could impose increased costs on our business.

Similarly, increased penalties for non-compliance could subject us to greater expenses in the event any of our products were found to not comply with such regulations.

Such increased costs or penalties could harm our business.

We could be the subject of future product liability suits or product recalls, which could harm our business.

We may be subject to involuntary product recalls or may voluntarily conduct a product recall.

The costs associated with any future product recalls could be significant.

In addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of our products and have a negative impact on our future revenues and results of operations.

Subject to a determination of the appropriateness of any recall, we remain responsible for the non-warranty costs from the recall of completed products we manufactured, sold or serviced prior to closing of the sale of substantially all of the assets and related liabilities of our EES Business to Webasto, pursuant to an Asset Purchase Agreement (the “Purchase Agreement”).

In particular, on August 24, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration (“NHTSA”) that named us as a brand of the affected equipment.

To the extent we are obligated under the terms of the Purchase Agreement with Webasto or as a result of the lawsuit filed by

Webasto against us seeking costs related to the recall or pursuant to applicable law for all or any portion of the costs incurred in connection with such recall, or any other such recall, our results of operations may be negatively affected.

There can be no assurance that a claim will not be brought against us in the future, regardless of merit.

While we maintain insurance coverage for product liability claims, our insurance may be inadequate to cover any such claims.

Any successful claim could significantly harm our business, financial condition and results of operations.

Additional lawsuits may arise in the future.

Occasionally we are also involved in governmental inquiries and investigations and administrative and regulatory proceedings.

The results of any such proceedings are unpredictable.

We record accruals for liabilities where we believe a loss is probable and reasonably estimable, however, our actual losses may differ significantly from our estimates.

As a result of an offer of settlement we made to Webasto in the pending litigation to avoid the future cost, expense and distraction of the litigation, we were required to record a litigation reserve related to the litigation, although such offer does not reflect our view of the merits of the claims made in the litigation.

An adverse or unfavorable resolution of any proceedings against us, including the litigation with Webasto, could have a material impact on our financial position, cash flows and results of operations.

In connection with our business, we receive, collect, process and retain certain sensitive and confidential customer information.

As a result, we are subject to increasingly rigorous federal, state and international laws regarding privacy and data protection.

Personal privacy, data protection and information security are significant issues in the United States and the other jurisdictions where we offer our products and services.

The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future.

We also execute confidentiality agreements with various parties under which we are required to protect their confidential information.

In the United States, the FTC and many state attorneys general are applying federal and state consumer protection laws to the online collection, use and dissemination of data.

Additionally, many foreign countries and governmental bodies, and other jurisdictions in which we operate or conduct our business, have laws and regulations concerning the collection and use of personal information obtained from their residents or by businesses operating within their jurisdiction.